More Tax Harmonization in Europe

In an unfortunate development, Luxembourg has finally surrendered to demands from other European governments and agreed that online retailers in the tiny duchy should be deputy tax collectors for other European nations. This means that shoppers in countries with high value-added taxes no longer will be able to buy goods and services and benefit from Luxembourg’s 15 percent VAT. This episode is illustrative of the anti-tax competition mentality in Europe, but America faces the same danger. Politicians from high-tax states want to impose a similar scheme (see here and here) in the United States. The International Herald Tribune has the sad details:

Plans to apply sales tax in the country in which services are consumed, rather than the location of the company that sells them, are the latest assault on Luxembourg’s ability to act as a tax haven. …With its low rates of sales tax, or value added tax, Luxembourg has attracted many of the biggest names in online sales, including companies like Amazon.com, Skype and PayPal. Luxembourg levies VAT at 15 percent, the minimum allowed under EU rules. But most EU countries have a higher rate, making the small but prosperous duchy an attractive location for companies offering electronic services. …Until Tuesday, Luxembourg had blocked proposals to levy sales tax at the place of consumption, saying the change would cost it €220 million, or $324 million, a year, equivalent to 1 percent of its economic activity. Taxation matters require unanimous agreement within the EU, but a country like Luxembourg - which has a population of only 429,000 - finds it difficult to withstand pressure from other countries if it isolated. …The deal was welcomed by larger countries, which stand to increase their revenue.

Peru May Become Latin America’s Next Success Story

The Senate passed the free trade agreement with Peru on Tuesday and it could not have come at a better time. That’s because Peru is increasingly distinguishing itself in the region as a successful market democracy. More than five years of sustained high growth (Peru grew 8 percent last year) are transforming the economy and spreading development to regions of the country that have traditionally benefited little from past progress. Unlike other countries in the region such as Argentina or Venezuela that are also experiencing rapid growth, Peru’s growth is characterized by widespread investment and wealth creation as opposed to redistribution or the mere effects of high world commodity prices.

Why is Peru succeeding? Again, unlike various other South American countries, it has sustained the far-reaching market reforms of the early to mid 1990s, has deepened some of them, and maintained sound macro-economic polices. The policies of openness and stability are paying off. Anybody who has been visiting Peru during the past 15 years as I have has noticed vast improvements in countless areas of national and everyday life, including notable progress in the past several years. The center of Lima, notoriously crime-ridden and dirty, has become safe and attractive. That kind of revitalization has occurred throughout the city and in major cities and towns of Peru. Consumer goods and services—cell phones, household appliances, and private education, for example—previously unavailable or in short supply have proliferated and serve all markets, rich and poor.

A change in values more oriented to a modern society may also slowly be taking place. The majority of Peruvians supported the FTA with the United States. The quality of service and attention to detail seems to have improved among Peruvian workers and management across a broad array of businesses. Peruvian writer Mario Vargas Llosa recently noted that he was now much more hopeful about Peru, not because of Peru’s positive economic indicators, but rather because “something profound seems to have changed in the culture of the country. One would have to be blind not to see that.”

In his excellent and new book, La Revolución Capitalista en el Perú (The Capitalist Revolution in Peru), leading Peruvian journalist Jaime de Althaus carefully details some of the changes in Peruvian society.

Traditional and non-traditional exports have boomed, with the latter experiencing higher growth. Peru has now become an exporter of software, to the tune of $20 million last year and growing at a rate of 25 percent.

The middle class is growing. The gap between the rich and the poor and between Lima and the rest of the country has also shrunk. Income gains have been proportionately greater for the poor than for the rich.

Peruvian companies—many of them new—have become successful nationally and internationally, not only exporting abroad, but setting up plants and offices abroad in areas as diverse as textiles, soft drinks, mining, milk products, clothing, banking and detergents. Some Peruvian companies have seen their businesses nationalized in Evo Morales’s Bolivia.

Vast areas of the Peruvian coast that have long been desert have turned green as a result of the “silent agroindustrial revolution” that has also taken place in some parts of the interior. Peru’s produce is now diverse, ranging from sugar cane to paprika to asparagus.

Personal credit as a share of total credit has tripled in the past ten years and now accounts for about 24 percent of total credit.

Department stores and other businesses now regularly cater to the “popular” classes. Enormous malls have been built and are now thriving in some of the poorest sections of Lima.

President Alan Garcia, whose first term in office during the second half of the 1980s was a disaster, is building on this progress and—I never thought I would say this—is so far turning out to be pretty good. In recent weeks he has written two articles in El Comercio, the country’s leading newspaper, in which he sets out a bold vision of promoting growth that has set off an intense national debate and spurred the leading news magazine, Caretas, to put “The Turn to the Right” on a recent cover.

Garcia has called for Peru to grow at Asian levels for years to come. He has accused bureaucrats, NGOs, environmentalists and special interests of blocking important policy changes that would increase growth and reduce poverty. He has made specific proposals to allow private investment in large parts of the jungle so as to export wood and to better protect the region from those who illegally log it; he has called on the private titling of large areas of land so that those with resources can exploit that land; he has called on dramatically increasing private investment in mining and other natural resources in Peru; he has called for allowing more private investment in the fishing industry; he has called for hydro-electric dams to built throughout Peru by private capital, rather than the state; he has called for the state to give up property that it does not use and give up functions that are better performed by others. And so on.

Peru is experiencing market success and may still see more of it. Thus also it has become an embarrassment for Hugo Chavez, who has neighboring Bolivia and Ecuador as client states and is pouring a lot of resources into the Peruvian countryside in a campaign to promote his anti-capitalist ideology. Peru has become a key country in Latin America’s ideological battle between the modernizers and the populists.

A lot still needs to be done in Peru before it can be declared a success story. For example, property and land still needs to be titled in the mountains, taxes are still very high, bureaucratic regulations remain onerous, labor laws are extremely rigid, the educational system is terrible. But the free trade agreement will help because it will give permanence to trade policy; and policy stability and competition have been key to Peru’s success thus far. If Alan Garcia can complete Peru’s unfinished agenda, he will have finally pushed the country into modernity and would go down not only as one of the greatest presidents of Peru, but also of Latin America at a critical time in the region’s history.

Supreme Court and GITMO

Today, the Supreme Court will be hearing oral arguments in the case of Boumediene v. Bush  The case represents an important battle over the constitutional doctrine of separation of powers and the “Great Writ” of habeas corpus.

This isn’t the place to lay out all the details, but I will try to boil it down.  The case is about two things: (a) the power of government to put people in prison; and (b) a power clash between the three branches of our government. 

President Bush says the entire world, including every inch of U.S. territory, is a battlefield.  As Commander-in-Chief, Mr. Bush and his military and intelligence agents will decide who must be imprisoned (sometimes the prisoners are called “enemy combatants,” “POWs,” “high value detainees,” or “imperative security detainees”) and the courts should not “second guess” the calls made by members of the executive branch. 

There is a Supreme Court precedent called Eisentrager that says the courts do not have jurisdiction over prisoners–so long as they are non-citizens who are kept in facilities abroad.  Guantanamo was selected as the site, in part, for that legal reason.  The Bush administration has tried to keep any legal claims by prisoners out of federal court.  When the Supreme Court ruled that a federal statute permitted claims in federal court, Bush went to Congress to change that law.  We now have the Military Commissions Act, which tries to withdraw federal habeas corpus jurisdiction from the federal courts–for any case arising out of Guantanamo.  The Court will be hearing arguments on the constitutionality of that law today.

In my view, Guantanamo gets so much media attention that most people end up losing the big picture.  What if the Supreme Court says habeas petitions from Guantanamo can be heard in federal court?  In an ironic twist, such a ruling might prompt Mr. Bush to announce, “I am closing of Guantanamo!” (footnote: The prisoners, however, will be moved to Abu Graib or some other facility).  What then?

“Jurisdiction” refers to the power of a court to decide a case.  Territory is usually a key factor in deciding jurisdiction.  If a prisoner in a California prison sends a habeas petition to a court in Maine, the Maine court will quickly toss it out because it has no jurisdiction.  It does not matter if the Maine judge is convinced of the prisoner’s innocence. 

The Bush administration says it should win the Boumediene case because federal courts do not have jurisdiction over non-citizen prisoners who are beyond U.S. borders.   And they refer us back to the terms of the Military Commission Act and the Eisentrager case.

I believe the Bush administration should lose this case.  The Framers of the American Constitution called the writ of habeas corpus the “Great Writ” because it is the fundamental check on the power of government to put people in prison.  In law, we say this writ “cuts through all forms,” such as territorial jurisdiction.  The courts do have jurisdiction over the “power of control,” which is the President.  The writ operates upon the jailer, not the prisoner.  Thus, if a habeas petition has merit, the court orders the jailer to release his grasp. 

The Supreme Court needs to protect the role of the judiciary in habeas litigation by invalidating the habeas removal provisions of the Military Commission Act.  Once jurisdiction is established, federal courts can move on to the “merits” of the petitions.  Whether any particular prisoner can persuade a court that his imprisonment is a mistake remains to be seen. 

The Cato brief in this case can be found here.  To watch or listen to me debate George Mason University professor Jeremy Rabkin, go here.  I am also participating in an on-line debate over at the Federalist Society.

In U.S. vs. the World, the World Keeps Winning

Last week, I wrote a bit about the latest results from the Progress in International Reading Literacy Study (PIRLS), which showed U.S. fourth graders losing ground against kids in competitor nations. Well, yesterday another report came out — the Program for International Student Assessment (PISA), which examines high school-aged kids’ math and science literacy — and the news was bad again. (PISA, by the way, usually assesses reading in addition to math and science, but the U.S. had a bit of a test-booklet malfunction this time around, invalidating our scores. Apparently, we lag behind other nations in standardized-test quality control, too.)

Let’s look first at science literacy. In 2000, the first year the PISA assessment was conducted, U.S. students’ average science score was 499 on a scale of 0 to 1000, just about equal to the 500 average for countries belonging to the Organization for Economic Cooperation and Development (OECD), a group of leading industrialized nations. In 2003, the next year PISA was administered, we fell further below the OECD mean of 500 with an average score of 491. Finally, in 2006 (the year covered in the latest report), we averaged 489, our lowest relative score yet.

How about mathematics literacy? In 2000, we were below the OECD average of 500, hitting 493. In 2003 we dropped further, with an average score of 483. And 2006? The OECD average was 498 and ours was 474, which, as in science, was our biggest deficit in PISA history.

So what does all this mean? As I wrote last week, one test does not a final verdict make, but combine PISA with PIRLS and other bad, recent testing results, and one can’t help but conclude that U.S. education is going in the wrong direction, and the biggest name in education reform—the No Child Left Behind Act—is a significant part of the problem.

Independence in 1776 to Dependence on 1776

I recently updated data I presented last year on the total number of federal subsidy programs.

It turns out that the federal government currently operates 1,776 subsidy programs. These include subsidies for states, cities, individuals, non-profit groups, and businesses.

As the chart shows, the number of subsidy programs has increased 25 percent since 2000. 

George W. Bush: He’s no Thomas Jefferson.

Taxes in 2009

All the Democratic presidential candidates appear to agree that taxes must go up.

We have been here before. Bill Clinton promised tax cuts in 1992 and then supported increases. Democrats in Congress supported Clinton’s tax hikes just as they had voted for the 1990 tax increases.

The result? Democrats lost almost one-quarter (63 seats) of their House caucus in the elections for the 103rd and 104th Congress. The Republican president that proposed the 1990 increases lost two years later.

The current group of Democratic presidential contenders may have forgotten this history lesson. I suspect congressional Democrats running next year will remember it.

Free Speech and Property Rights in St. Louis

The St. Louis Post-Dispatch has a story on an important free speech case here in St. Louis. Property rights activist Jim Roos, whose run-ins with city bulldozers are documented in my recent study, has painted an enormous two-story mural on the side of one of the buildings the city has threatened with eminent domain. It reads “End Eminent Domain Abuse,” and its location makes it plainly visible for commuters driving on Interstate 55, a major commuter route.

The city isn’t amused, and has charged Roos with having an “illegal sign.” Roos fought back:

Roos fought the citation, claiming the city was targeting him not because of the size of his sign, but because of its message.

“I think if it said, ‘Go Cardinals,’ we wouldn’t have any problems,” Roos said.

The city routinely approves exemptions for large signs. On the same day a city panel rejected Roos’ claim, it granted an appeal by Laclede Gas to display a sign of over 1,000 square feet on the utility’s downtown headquarters.

Even so, content is not the issue, city officials say — it’s keeping the city tidy.

“Can you imagine what our city would look like if everyone were allowed to paint a 363-square-foot, two-story sign on their buildings?” asked City Attorney Patti Hageman.

Roos has taken his case to federal court, where he has drawn the aid of the Institute for Justice, a libertarian advocacy group in Arlington, Va. The interest in Roos’ fight is twofold for the institute, which advocates for both free speech and property rights.

It sure would be terrible if everyone were allowed to express their political opinions by painting murals on their buildings.